Insider – Structures and Buildings Allowances

In 2018, the UK Government introduced the Structures and Buildings Allowance (“SBA”) in respect of new expenditure incurred by businesses on non-residential buildings and structures.

This relief provides tax deductions for expenditure incurred on certain assets that would not previously have qualified for capital allowances, potentially reducing the cost of investment and carrying on business in the UK.

The purpose of the legislation is to stimulate investment in the construction, development and improvement of commercial buildings and structures and trying to bridge the gap with our overseas counterparts.

Overview

• SBAs are available for qualifying expenditure incurred on the construction of new, and the refurbishment / renovation / conversion of existing, commercial buildings and structures.

• The construction contract must be entered into on or after 29 October 2018. (HMRC may extend this to the demolition or enabling works contracts, which are in preparation for the construction of the building or structure).

• Standard entitlement rules apply in terms of requiring a ‘relevant interest’ in the land.

• Available in respect of both UK and overseas properties, where the business is within the charge to UK tax.

• This relief is not available for dwellings i.e. buildings which are in ‘residential use’ (this includes FHLs).

• Relief for SBA is available on a straight-line basis, which is first calculated from the asset ‘brought into use date’, currently at a rate of 3% per annum, i.e. over 33⅓ years.

• As part of making a SBA claim, an ‘allowance statement’ must be prepared and kept on file – more details on this can be found below…

What qualifies?

Qualifying expenditure includes costs incurred on the structure and / or building, as well as incidental costs such as demolition works and/or land alterations to facilitate the construction and associated fees. No relief is available in respect the land itself.

Qualifying expenditure does not include expenditure that would qualify for plant and machinery allowances (“PMA”) or special rate integral features (“IFA”).

An analysis must be undertaken to segregate expenditure relating to the provision of structures and buildings from expenditure on the provision of plant and machinery (or IFA).

SBAs as a tenant

There is scope for a lessee to claim SBAs to the extent the lessee incurs its own qualifying SBA expenditure, e.g. as part of a tenant fit-out. The lessee can claim SBAs during the term of its lease.

On the expiry / exit of the lease, SBAs will no longer be available, but the balance of unclaimed SBAs will effectively be allowed as a capital loss for the lessee (which can be offset against other capital gains within the company/group).

The allowances statement

As a requirement of claiming the SBA, when it comes to selling the property you will be required to provide an ‘allowance statement’ to the purchaser setting out what allowances you have claimed, this would include –

• The date of the earliest contract for the construction of the building or structure;

• The amount of qualifying SBA expenditure incurred; and

• The date it was first brought into use.

Any SBAs claimed during the vendor’s period of ownership will be treated as additional consideration in the Chargeable Gains computation. This differs from the existing provisions relating to plant and machinery, whereby PMAs cannot create or increase a capital loss but do not impact a capital gain (which remain unchanged).

Provided this allowance statement is obtained, the purchaser will inherit the residual SBA pool, which will be written down over the remainder of the 33⅓ year period.

In addition, the grant of a long lease (for a term of more than 35 years and conferring at least 75% of the market value of the property) is treated as the lessee acquiring the relevant interest and transferring entitlement to claim SBAs from the lessor.

If a newly built property is acquired from a developer, the new owner may be able to claim SBAs based on the part of their own purchase consideration which relates to the acquisition of the building or structure.

Key considerations

For each construction project, it will be necessary to –

• Establish the ‘contract commencement date’ for the relevant works and the date on which the structure/building was ‘brought into use’.

• Prepare an ‘allowance statement’ which will be required to be kept on file and passed over to the new owner following a subsequent disposal.

This process and analysis can be especially complex for taxpayers with large property portfolios and numerous ongoing construction projects. In such circumstances, it is likely that these projects would have different contract dates and would be brought into use at different times. Businesses should, therefore, consider methods for tracking this data going forward.

The legislation allows a simplified approach to be adopted whereby the start of the 33⅓ year clock for SBAs can be deferred, e.g. until the beginning of the next chargeable period, without needing to time apportion in year one – this applies primarily to existing buildings, as the asset is effectively already ‘in use’. This could be worth considering where annual additions are too numerous to track effectively on an asset-by-asset basis.

How we can help

MJS has a specialist dedicated team made up of Chartered RICS Surveyors and Tax professionals who have years of experience in preparing capital allowances claims. If you would like to explore this further and to see how we could help to support you in optimising this tax relief, please contact Phoebe at – phoebe@mjs.tax or call 07961 580250.